Tag: pharmaceuticals

340b Rebate: Essential for Under-Resourced Hospitals or a Hinderance to Pharmaceutical Companies?

Earlier this month, the United States Court of Appeals for the First Circuit issued a Rule 42 motion to voluntarily dismiss a case filed by the American Hospital Association (AHA) against Robert F. Kennedy Jr. and the Health Resources and Services Agency (HRSA) regarding the implementation of a new pilot 340b rebate program. The 340B program provides substantial discounts on outpatient drugs to covered entities fitting into six categories: disproportionate share hospitals, children’s hospitals and cancer hospitals exempt from the Medicare prospective payment system, sole community hospitals, rural referral centers, and critical access hospitals. These entities, after being deemed eligible for the program, receive significant discounts on a substantial amount of outpatient medications. This program has enabled under-resourced hospitals serving vulnerable populations to provide comprehensive outpatient medication options without imposing a significant financial burden on providers or patients. The 340b program has expanded significantly from approximately 389 covered entities at its inception in 1992 to 5,085 in 2022. 

The usefulness of the 340b drug pricing program has long been debated between healthcare providers and drug manufacturers. Covered entities have argued that these discounted drug prices are essential for poorly resourced healthcare centers to provide adequate care to vulnerable Americans. Drug manufacturers have raised concerns about duplicate discounts, in which discounts are provided through 340b and Medicaid, as well as issues with oversight and transparency regarding who truly saves money through the 340b program.

The proposed pilot sought to address some of the concerns held by drug companies and it would have required 340b providers to assume the full cost of 10 common-use drugs, primarily used to treat diabetes and chronic heart conditions, and later submit claims data to the drug manufacturers for potential 340b pricing. This pilot program was met with resistance from several providers, resulting in legal action from the American Hospital Association. 

In American Hospital Association et al. v. Kennedy et al. the AHA and multiple covered entities filed suit against Secretary Kennedy and HRSA in the United States District Court for the District of Maine, alleging that the proposed pilot program violates the Administrative Procedure Act and would impose unnecessary administrative and financial burdens on already under-resourced hospitals and healthcare providers. The Plaintiff’s complaint alleged that the over 1,000 comments submitted during the mandatory comment period for this proposed pilot were largely ignored by Secretary Kennedy and HRSA, thereby violating the Administrative Procedure Act’s public comment requirements

Several pharmaceutical companies submitted motions to intervene in support of HRSA’s efforts, citing issues with duplicate discounts for Medicaid and 340b, as well as concerns about program integrity and transparency. Secretary Kennedy and HRSA, in their response to AHA’s complaint, alleged that the pilot program and its comment period proceedings were not in violation of the Administrative Procedure Act precedent and that the plaintiffs had failed to show any irreparable harm. The District Court of Maine granted the plaintiff’s motion for a preliminary injunction, which the defendants appealed to the United States Court of Appeals for the First Circuit. The case was ultimately dismissed, and the Department of Health and Human Services withdrew the proposed pilot, indicating that they may restart the administrative process for a similar program in the future. 

340b reform remains an important topic of conversation as the program continues to expand across the nation. While this most recent attempt at reform ultimately did not come to fruition, it seems likely that more attempts for 340b reform may be on the horizon, indicating potential changes in the program forthcoming. 

D.C. District Court Limits Discounts to Orphan Drugs

On October 14, 2015, Judge Rudolph Contreras of the District Court for the District Court of Columbia sided with drugmakers in a decision that narrowed the scope of 340B, a popular but controversial drug discount program. The decision effectively bars children’s hospitals, cancer hospitals, and rural hospitals from obtaining 340B discounts for so-called “orphan” drugs like Prozac.

The plaintiffs in the case, Pharmaceutical Research and Manufacturers of America (“PhRMA”), is a lobbying group comprised of 48 of the nation’s pharmaceutical heavyweights, including Novartis and Pfizer. PhRMA challenged an HHS Interpretive Rule, which would have expanded the scope of the drug discount program. PhRMA argued that the agency’s Interpretive Rule contravenes the plain language of 340B. Judge Contreras agreed.

Background to 340B and the Disputed Interpretive Rule

At the heart of this dispute are high-demand “orphan” drugs like Prozac. Orphan drugs are drugs developed to treat a rare disease or condition; the rare disease or condition is the “orphan” use. But, by and large, orphan drugs are more well-known for their non-orphan uses. In the case of Prozac, the drug’s designated orphan use is autism and certain types of body dysmorphic disorders. Yet most patients and providers use Prozac as a treatment for depression.

When the Affordable Care Act was passed, Congress significantly expanded the types of covered entities that would be eligible for 340B program discounts. The ACA added children’s hospitals, freestanding cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals to the 340B drug pricing program. The newly covered entities, however, are excluded from certain types of 340B program discounts.

Under 340B(e), newly covered entities do not have access to discounts for a “drug designated . . . for a rare disease or condition.” Pharmaceutical companies and providers disagreed over the scope of 340B(e). Pharmaceutical companies argued for a broader interpretation and insisted that the provision refers to all types orphan drugs.

To clarify the confusion, HHS issued an interpretive rule on July 23, 2014. Under the Interpretive Rule, drugmakers must offer orphan drugs at a discount to newly-covered entities when the covered entity purchases the drug for a non-orphan use. In the Prozac example, that means a covered entity like a rural hospital could get a discount on Prozac when purchasing the drug for depression (a non-orphan use), but not for autism (the designated orphan use). Drugmakers that fail to comply and refuse to offer the discount price must provide a refund to the covered entity for the overcharge.

D.C. District Court Applies Chevron Test, Vacates HHS Ruling

The court vacated HHS’s Interpretive Ruling, finding that it failed the Chevron test. Under the first prong of the Chevron test, the question is whether Congress has directly spoken on the precise question at issue. If so, the agency must follow the intent of Congress as clearly expressed in the statute. If the congressional intent is unclear, the court proceeds to the second step of the Chevron analysis to determine whether the agency’s ruling is “based on a permissible construction of the statute.”

In this case, Judge Contreras concluded Congress’s intent was clearly expressed in 340B(e) and its related statutory provisions, and that the second part of the Chevron analysis was unnecessary.

The court held in favor of the pharmaceutical company and rejected HHS’s Interpretive Rule.

After concluding that the Interpretive Rule failed the first prong of the Chevron analysis, the Court vacated the Interpretive Rule as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” In effect, the D.C. District Court’s decision signals a victory for pharmaceutical companies who now do not have to provide orphan drugs at a discount for newly-covered entities like children’s hospitals and rural hospitals.

Experts Foresee Legal Attacks on Other Parts of Drug Discount Program

HHS can still appeal. In the meantime, legal experts weighed in on Law360 and predicted that the decision could encourage drugmakers to lodge additional lawsuits on other parts of the 340B program. In particular, the pharmaceutical industry has railed against the “mega-guidance” that HHS released in August 2015 for the drug pricing program. The omnibus guidance is still in the note and comment process, with the current 60-day comment period ending on October 27, 2015.

Lawyers speculate that this decision leaves the omnibus guidance vulnerable to legal attack. Based on this decision, pharmaceutical companies can challenge the mega-guidance in court as soon as it is finalized, before HHS even attempts any type of enforcement. As Kristi Kung of Pillsbury Winthrop Shaw Pittman stated, “The court here found that the agency didn’t actually have to take an enforcement action against a manufacturer for there to be [a lawsuit].”

Reactions from Providers Underscore Deep Disappointment, Concern Over Access

The District Court decision struck a deep nerve among hospitals and providers. Immediately after the decision was released, the American Hospital Association (AHA) released a statement expressing its deep disappointment.

“This decision comes at a steep cost for the vulnerable patients cared for by rural and cancer hospitals,” AHA stated. “[The decision] will reduce access to critical services and treatments for some of the most vulnerable patients in society. Sadly, the biggest beneficiary of this ruling is the pharmaceutical industry – it does nothing to help either patients or taxpayers.”

The American Society of Health System-Pharmacists (ASPH) similarly stepped out in opposition of the decision. In its own statement, ASPH pointed out the adverse effects of the decision on access to care. According to ASPH, “this ruling will limit access to critical medications for the sickest patients in our healthcare system. . . . Without access to these discounts, participating hospitals may not be able to absorb the cost of providing care to patients who otherwise would not be able to afford it.”

In an interview with Modern Healthcare, the National Rural Health Association agreed, adding that the decision might cause rural hospitals to pass some orphan drug costs onto patients and could lead to some hospitals not stocking certain medications.

The overwhelming reaction against the decision is clear: the D.C. District Court decision creates public policy implications which cut off access to affordable care. By rejecting HHS’s orphan drug discount rule, this decision strongly disadvantages the same patients from underserved areas which the Affordable Care Act meant to assist.